The Teva-Allergan deal and the power of the 'focus factor'

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As we come to the end of the week and look back on what was a momentous Monday, full of newsworthy deals, Teva’s $40.5 billion acquisition of Allergan’s generics business stands out. Throughout the week, various analysts have weighed in on the factors that drove this deal.

One important aspect of this deal—and most others happening in the biopharma industry—is the "focus factor." For Allergan, that means focusing on branded and specialty pharmaceuticals—and jettisoning the generics division. As Allergan CEO Brent Saunders explained in a statement, the goal of the acquisition was to "accelerate Allergan’s evolution into a branded growth pharma leader."

As for Teva, the goal of training its laser-like focus on becoming the largest generics company in the world is to increase its scale in order to leverage its power in the marketplace. In addition, Teva also seeks to cut costs—estimated annual cost-savings from eliminating redundancies is $1.4 billion—while offsetting the upcoming patent expiration of its $5.5 billion flagship multiple sclerosis drug, Copaxone.

Rethinking diversification

BioPharma Dive spoke to John Jaeger, a partner at Decision Resources Group (DRG), about the role of the "focus factor" in the Teva-Allergan deal. "For Teva, the focus is on expanding their generics business and achieving scale as their buyers, particularly US insurance companies, begin to consolidate and create greater buying power," said Jaeger. "For Allergan, the move allows them to place greater focus on specialty product development within the branded market, which requires a very different culture, perspective, and structure than a generics manufacturer."

Of course, Teva and Allergan are in good company as the M&A trend reaches a fever pitch, resulting in $221 billion worth of deals for the first six months of this year. "This deal is another example within biopharma that we are seeing across the healthcare landscape," said Jaeger. "Companies are trying to focus their market offerings in order to beat their direct competitors to dominant scale."

The need to become more efficient

And finally, the influence of many of the cost-saving provisions of the Affordable Care Act are being more acutely felt throughout the biopharmaceutical supply chain, from branded manufacturers, to generics companies, to hospitals, payers, physicians, and patients.

In particular, tougher price regulations, both in the U.S. and outside of the U.S., are forcing companies to become more efficient and cost-conscious as prices are forced down and margins are threatened. Because of this intensifying pricing pressure, targeted consolidation makes more sense than ever, and will likely continue for the foreseeable future.

Jaeger summed up the impact of all of these factors: "As they see their customers continue to consolidate, particularly health insurers and hospitals, biopharma manufacturers are moving away from diversification and focusing more on expanding their core offering to achieve efficiency, focus, and dominant scale. This deal highlights that urgency for manufacturers as they continue to reexamine their commercial models in the new era of U.S. healthcare."